EDITORIAL: Consumer Price Index (CPI) rose by 27.6 percent year on year in January against 24.5 percent the month before and 13 percent for December 2021 (before the PTI administration launched its unfunded relief package that envisaged massive subsidies on petroleum and products and electricity prices), as per the Pakistan Bureau of Statistics.
This calculation does not take account of de-control of the interbank rupee value on 26 January 2023 vis-a-vis dollar, an economically disastrous policy that was implemented from October 2022 onwards.
The same day the International Monetary Fund (IMF) announced the date of arrival of the mission, 31 January, thereby strengthening the perception that this policy was a key impediment in the start of the talks on the pending ninth review. This de-control led to a depreciating rupee that has considerably weakened a thriving black market though the impact on remittances may take longer to correct.
On 29 January, a Sunday, Finance Minister Ishaq Dar announced increasing the price of petrol and high speed diesel — the two main sources of revenue from petroleum levy — by 35 rupees per litre lending further credence to the perception that this too was an IMF precondition for start of talks on the ninth review; Dar’s stated rationale that the decision was taken as there was a shortage in the market based on speculation on the social media that prices would rise by 50 rupees per litre did not justify the raise three days before the 1st of February, the usual practice.
It, therefore, stands to reason, that the outcome of these two policies taken in January would fuel inflation by at least 10 to 15 percentage points in the current month and as and when the IMF mission and the government team agree on the amount and date on which tariffs on utilities must be raised, the impact on inflation would simply escalate.
The key question is who will bear the brunt of these decisions? Disturbingly, the answer is that both these measures are regressive in nature and therefore their incidence on the general public would be a lot higher relative to the elite. If one further adds the Prime Minister’s decision, reportedly in consultation with the Finance Minister, to give 150 percent of the 2017 basic salary as executive allowance to the officers of the federal secretariat (grades 17 to 22), over and above the decision to raise salaries by 15 percent in the 2022-23 budget, ostensibly to eliminate the disparity in salaries of officers of the federal secretariat, the obvious concern is that this was not the time to take this decision — not only because it will be vigorously opposed by the Fund mission but also because any increase in wages will further fuel inflation.
Additionally, given the appalling state of the economy and the burgeoning budget deficit this decision was economically inappropriate to say the least.
Other economic policy decisions that are fuelling inflation today are an unsustainable budget deficit and failure to slash current expenditure. Instead the focus remains on slashing development expenditure, as in the past, that, in turn, will have negative implications on growth.
The budgeted tax revenue associated with the budgeted 5 percent growth of the economy that has been degraded to 2 percent with many domestic economists expressing scepticism about the possibility of achieving even this massively scaled down growth implies a further shortfall in tax revenue that would have to be met by higher taxes. If past precedence is anything to go by, higher revenue would be realised from the low-hanging fruit — raising existing indirect taxes or binging in more items under the sales tax net and not from widening the tax net itself.
The government in its ongoing negotiations with the IMF needs to focus on easing the burden on the general public by undertaking massive immediate reforms in the tax and power sectors, and through improving governance. And though the intent to reduce inflation, or minimize it given the ongoing Fund programme, has been frequently stated by the 70 plus cabinet members, yet it has not translated into viable policy decisions so far.
Copyright Business Recorder, 2023
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